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Why should a new partner contribute towards goodwill on his admission?

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CBSE/Class 12/Commerce/Accountancy Tuition/Class XI-XII Tuition (PUC)

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Tutor

Due to admission of a new partner, old partners have to share their part in their value of goodwill created till date. Hence they (old) partners wants contribution from new partner for their compromise in the value of goodwill for new partner. New partner would compensate to old partners in their sacrificing... read more

Due to admission of a new partner, old partners have to share their part in their value of goodwill created till date. Hence they (old) partners wants contribution from new partner for their compromise in the value of goodwill for new partner. New partner would compensate to old partners in their sacrificing ratio.

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Mahantesh

Then onld partners already spent on god will So they like new partner to contribute towards goodwill on his admission
Comments

The old partners have spent their time and effort and have contributed to the growth of the business. They have built a brand and loyalty among customers. This intangible reputation which has been established is termed as 'Goodwill'. It would be unfair of the new partner to enjoy all the benefits of... read more

The old partners have spent their time and effort and have contributed to the growth of the business. They have built a brand and loyalty among customers. This intangible reputation which has been established is termed as 'Goodwill'. It would be unfair of the new partner to enjoy all the benefits of the already nurtured brand and therefore they pay an amount as their contribution towards the firm's goodwill.  

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The goodwill existing for the business at the time of admission of new partner has been built by old partners. Thus new partner acquire the right to share the future profits and this include the capability of the partnership to general same or more profits. Thus the new partner must acquire this right... read more

The goodwill existing for the business at the time of admission of new partner has been built by old partners. Thus new partner acquire the right to share the future profits and this include the capability of the partnership to general same or more profits. Thus the new partner must acquire this right by contributing towards goodwill in his profit sharing ratio.

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Teacher

Because the old partners sacrifice their future share of profits in his favour. That is why the goodwill brought in by the new partner is given to sacrificing partners in accordance to their sacrifices.
Comments

Old partner sacrifice there profit share due to admission of new partner to compensate the sacrifice done by old partner new partner contribute towards goodwill
Comments

Intellactual Education

New partner is required to contribute towards Goodwill Because old Partners are carrying businees from past bcz of that the sales & services got increased and old partners will not share that without any considration That"s why new partner is required to contribute towards goodwill
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Accounting Expert

New Partner will contribute towards Goodwill because Old partners have done hard work in the past to identify their business product and due to this their business and its product has reputation in the market and it will earn more as compared to new business and this due to Goodwill which old partners... read more

New Partner will contribute towards Goodwill because Old partners have done hard work in the past to identify their business  product and due to this their business and its product has reputation in the market and it will earn more as compared to new business and this due to Goodwill which old partners have generate, so new partner will contribute some amount towards goodwill to compensate old partners.

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Trainer

As per bookish term we can say that goodwill means the 'good name' or the reputation earned by a firm through the hardwork and honesty of its owners. In one line we can say that goodwill is the extra earning capability of a firm in a competitive market situation. To creat the reputation the partners... read more

As per bookish term we can say that goodwill means the 'good name' or the reputation earned by a firm through the hardwork and honesty of its owners. In one line we can say that goodwill is the extra earning capability of a firm in a competitive market situation. To creat the reputation the partners made  their efforts. So when ever a new partner is entering the business, he will have the privilege to use the goodwill of the firm which was created by the old partners. He doesn't has to make any effort to creat the goodwill. For this reason he has to contribute towards the firm's goodwill for using it. 

In short we can say that the new partner can avail the reputation of the firm only when he purchase  his share of goodwill from the old partners or pay premium of goodwill to the old partners.

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Tutor

Let me explain this to you with an example. There are 2 shops in your locality which are selling groceries, one is Big Basket and one is Grofers. Normal return in grocery business is 10% but Big Basket has a return of 15%. Big Basket is favourite choice in your locality. Considering investment made in... read more

Let me explain this to you with an example.

There are 2 shops in your locality which are selling groceries, one is Big Basket and one is Grofers.

Normal return in grocery business is 10% but Big Basket has a return of 15%. Big Basket is favourite choice in your locality. Considering investment made in both grocery stores is same. If both the grocery stores invite for partnership of 20% for Rs 2 Lakh.

Do you think anybody would want to invest in Grofers as big basket will get them 5% extra return with same investment? 

Hence when any business is earning more than normal return, goodwill is required to be contributed, hence is goodwill is factored on profit. 

Usually when business is purchased it is assumed that this trend of profit will continue for X number of years. That is why we use phrase like 3 Years of Purchase of Goodwill.

Normal Profit = Rs 1,00,000

Big Basjket Profit = Rs 1,50,000

Super Profit - Rs 50,000.

Goodwill 3 Years Purchase = Rs 50,000*3 = Rs 1,50,000.

Hence Partnership in Big Basket would require Rs 3,50,000 compared to Rs 2,00,000 in Grofers.

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